Good day and thank you for standing by. Welcome to the Taboola Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to turn the conference over to Brinlea Johnson [ph], Investor Relations. Please go ahead.

Thank you, and good morning, everyone. And welcome to Taboola's second quarter 2023 earnings conference call. I'm here with Adam Singolda, Taboola's Founder and CEO; and Steve Walker, Taboola's CFO. The company issued earnings materials today before the market and they are available in the Investors section of Taboola's website. Now, I'll quickly cover the Safe Harbor. Certain statements today, including our expectations for future periods are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information and we undertake no duty to update them, except as required by law. Today's discussion is also subject to the forward-looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated. During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release posted on our website. And with that, I'll turn the call over to Adam.

Thanks, Brinlea. Good morning everyone and thank you all for joining us for our second quarter call. We had a strong performance in Q2, beating the high-end of our guidance across all metrics. We achieved $123 million in ex-TAC gross profit, $16 million in adjusted EBITDA and $8 million in free cash flow. We are also excited to raise the midpoint of our full year 2023 guidance. As we are getting closer to 2024, we are bullish on our future, we expect a step change in our financial performance, and we are reiterating our guidance for 2024 of over $200 million in adjusted EBITDA and over $100 million in free cash flow. Our performance in Q2 was driven by a few things. In our core business, publishers all over the world continue to trust us and sign long-term partnerships, which we saw with new and competitive wins this quarter from Nexstar Media, Barstool Sports, Futura, and more. This is on top of key partners like Time, Disney, Unidad Editorial, BBC, One India, The Print and Bangkok Post renewing their long-term relationships with us. Publishers are demanding less vendors and more true partners as they chart their growth, diversify their revenue, empower their editorial teams and battle the never ending changes being thrown at them by the walled garden platforms. Being an ad provider is not enough, and this is where Taboola is unique, addressing all of these objectives in a win-win manner with our publishers. Let me share more about our momentum in Q2. We are outpacing our expectations on eCommerce, which now represents nearly 20% of ex-TAC, up from 15% last quarter. I believe eCommerce will continue to be a key part of our business as users are looking to make decisions that matter to them based on information…

Thanks Adam and good morning, everyone. As Adam noted, our Q2 results beat the high-end of our guidance on all metrics. We are also raising the midpoint of our full year 2023 guidance and reiterating our 2024 expectations of over $200 million in adjusted EBITDA and over $100 million of free cash flow. Let me talk now about our Q2 results, which exceeded the high-end of our guidance on all metrics. For Q2, revenues were $332 million versus the midpoint of our guidance of $309 million; gross profit of $97.1 million versus the midpoint of $83 million; ex-TAC gross profit of $123.1 million versus the midpoint of $110 million; adjusted EBITDA of $15.7 million versus the midpoint of $1 million; and non-GAAP net loss of $6.4 million versus the midpoint of a loss of $21 million. We generated positive free cash flow of $7.8 million. I will note that Q1 and Q2 growth rates suffer from difficult comparables in 2022 before the digital advertising market weakness. We expect to return to positive revenue growth in the second half of 2023. Relative to our guidance, we saw over-performance in eCommerce, Taboola News and in our bidding offerings. eCommerce continues to impress, taking the momentum of the back half of 2022 through the first half of the year. The U.S. business has had strong retention and increasing budgets from our advertisers, or merchants as we tend to call eCommerce advertisers. In addition, the merchants or advertiser business in Europe has momentum due to our Google PLA campaign management, and there are positive supply side drivers with new partnerships in the buy now pay later space. Taboola News will approach $100 million in revenues this year versus over $50 million in revenues in 2022. Finally, our bidding offerings continue to gain momentum. Microsoft…

[Operator Instructions] The first question comes from Andrew Boone from JMP Securities. Please go ahead.

Good morning and thanks much for taking my questions. I wanted to go to the '23 guide. You guys beat 2Q gross profit ex-TAC by $13 million, but are raising the midpoint of 2023 guidance by $6 million. So I guess the question is, is there some incremental weakness or something else you guys are seeing as we entering 3Q? Or is that just conservatism? And then, Adam, great to see the progress in terms of improving yield via tools. Can you talk about Max Conversion and Target-CPA benefits? And what that is helping to a mark in terms of budgets? Thanks so much.

Thanks, Andrew. Good to hear from you. So I'll address the first one. So in terms of the full year guide, we obviously had a big beat in Q2, where we beat the high-end of our guidance by $8 million on ex-TAC, and almost $10 million on adjusted EBITDA. We want to be conservative though. So we don't want to count on that level of outperformance kind of continuing throughout the year in Q3 and Q4. Hence, the fact that we kept the high-end of our guidance the same, while raising obviously the bottom end, lower expectations are off the table at this point. So we raise the lower end. So it's really as you said, it's conservatism, it's wanting to not count on that level of over performance throughout the year, even though we're obviously very happy that we did have that level of beat in Q2.

Hi, Andrew. So on the -- based on the bidding strategy, so just to level set, we -- about half Taboola's R&D is working on performance advertising. And the reason is that we think that there's a huge upside for Taboola to basically make advertisers successful, especially as we want to become the master [ph] by open web company, we now have about 18,000 advertisers, Google has 10 million. So there's a huge range of how much we can capture more advertisers big and small. But to do that, you have to make it easier for advertisers to be successful when they try to work with you. And then once they're successful, you want to help them spend more and that's more of an NDR kind of dimension. If you look at Taboola, over the last many years, we built an amazing business where advertisers bid on Taboola using CPC. So they had to guess what is a click is worth, were by the way they think about their business is how much does the client worth. So if your flower -- my wife has a flower shop, so she knows how much a client is worth to her as a business. But if she was to work with Taboola, she would have to guess a CPC. Right now, all she has to do is to say, well, this is how much a client is worth, or here's $5,000 budget with Max Conversion, you go Taboola and help me get as many clients as I want and tell me what is the most affordable price a client could worth as it comes from Taboola. This is the beginning of a revolution from my perspective, because that means that we can migrate tens of thousands of advertisers over time to work with Taboola and only focus on their own business objective. Their client acquisition cost, their budget and -- so that's I'm happy to say that we all raise the toast at Taboola this week, because Max Conversion and Target-CPA is now general availability. So it's not available to any advertisers, self service or enterprise accounts. I suspect, in 2024, more than 50% of our revenue and that's going to be a fairly large amount, especially as Yahoo is ramping up, we'll be using advanced bidding strategies in AI such as Max Conversion. The next in line, by the way, after that is Max revenue. And Max ROAS where advertisers could basically -- advertisers could tell us, we have more than one product we're selling through Taboola, here's the price of each one and maximize not only the conversions but just make us more money. That is the next in line from product roadmap. So over time, CPCs will be completely part of our past. So I'm very excited about it. And we're putting half of our deck energy on that. Thank you.

Thank you.

Thank you. One moment for our next question. Our next question comes from James Kopelman from TD Cowen. Please go ahead.

Thank you. Good morning. With eCommerce outperforming, does this change at all your view of how big a percentage of the overall business eCom will be once we get past the near-term macro that's created these unusual comps for coordinated advertising? In other words, how should we think about the mix of eCommerce versus core going forward? And is there anything particular you would call out in the second quarter -- with the third quarter as being kind of the key one or two drivers of eCommerce growth? And then I have a follow-up for Steve.

I can start. Steve, feel free to jump in and good morning, James. So one, it's really exciting to see eCommerce, something we got into about 3 years ago with the acquisition of Connexity, really paying off as it relates to the synergy with our business. We are seeing on the one side, just you know, great market fit, advertisers buying from Connexity and Skimlinks are getting amazing value. And especially now when advertisers want to be close to the acquisition, the one distribution to be simple, they want to know that they're putting $1 and they can make more than they spent. This is just a very profitable channel for them. It's works. And the more we're adding new advertisers within Taboola sales team, the more we see this business grown. So that's just a fundamental part of that business. On top of that, if you add turnkey, which you may have seen in my letter, I put a screenshot, we're seeing a phenomenal growth of essentially -- this is a great one of those. There's more demand and supply. There are more publishers who want to pull us to turnkey, which means for us to write the eCommerce content for them using our data, and then to drive traffic to it, and then monetize it. If you go to Time.com Stamped, which is the eCommerce website that Taboola and Time.com partnered on. It's beautiful. It's ranked at the top of Google search. If you -- if you're searching for things like which check-in account should I open or best smartphones of 2023, were the top results on search engine, the pages, it looks beautiful, and it drives very high yield. To the point and I think over time, this might be even bigger than our core business for publishers, because some of them, so this is a great momentum. We're still early on turnkey, but I think this has big potential of becoming a big portion of our business over time. I think publishers eCommerce, they all want it. And I think it might be a third of their business over time. So the way I think about it is, if you're not offering eCommerce to publishers, you may have nothing to offer over time, because that's going to be a big portion of what they see as a growth engine.

Great. And then a quick follow-up for Steve. We've been hearing other companies describe somewhat of a stabilization in the digital ad environment over the last couple of months. How would you guys characterize what you're hearing in conversations with advertisers both in the U.S and internationally? For example, have you seen any change in the video advertising trends, which I think were somewhat soft earlier in the year? Thanks a lot.

Yes. So thanks for the questions, James. So yes, we would say that what we're seeing in the digital advertising environment right now is stability. So in fact, ever since about Q3 last year, we've seen relative stability compared to obviously the first or the second and third quarter of last year. So we see relatively normal seasonality, we're seeing relative stability of budgets, et cetera. And I think most advertisers that we talked to, what they're basically saying is, they're still watching the macro a bit. They're probably getting a bit more bullish, like a lot of people are about the potential for a soft landing and not a recession. But I think they're still cautious, but stable, their spend is stable, they're still spending kind of as they were. Now we are seeing ups and downs in different portions of our business, for instance, eCommerce has been particularly strong. Bottom of funnel, things where you're helping to convert directly into revenue have been particularly strong. Top of funnel video still remain soft relative to historical norms. So we haven't seen a further softening of it, but it's definitely soft relative to historic -- history. And I think that's consistent with what we've said in the past, which is, the further down the funnel you go, the more stability you get, and the more strength you get. And the further towards the top of the funnel you are, the softer things are. So generally, that's consistent with what we're seeing. So we've seen pretty much relative stability since the end of Q3 of last year, and nothing has changed dramatically on that.

Great. Thanks, guys.

Thank you. One moment for our next question. Our next question comes from Laura Martin from Needham. Please go ahead.

Good morning. Staying on the eCommerce spin, Adam, I'm interested in whether you have channel conflict because of these new companies where you're doing content, doesn't that threaten the actual companies that are in your core business where their core business is doing content? Why is this a channel conflict for you guys?

So, hey, Laura. Good morning. It's -- [indiscernible] we're working together, so the editorial team of the publisher works very closely with the editorial team that we've built to -- to create that content. So this is not sort of like a vendor ship type of relationship. It's very much a partnership that is deep. And in fact, what I like about is that I think publishers in general, want to work with companies that are more partner type. CPM and being ad tech is just part of the past, it sounds good enough. So you need to be able to build relationship that is driven by trust with the editorial team, the subscription team, the audience team, the commerce team. So all of those people on the publisher side take part in deciding who they’re going to work with side by side to the revenue person. So [indiscernible] this is very much a trust oriented relationship. And two, it's very different type of writing, right? So when you cover the news or entertainment or things of that nature, it's very different than covering things, like products or covering things such as financial services. And also there's a data element of what do users want to read to begin with. So we've been doing this with Time.com, as an example, for almost 6 months now, and it's a huge success. I mean we're -- we will keep expanding how we're promoting that content on the homepage of Time.com. Our teams are spending so much time together. I just hope we can do 100x more Time.com from our perspective, because it's really encouraging beginning.

Great. And then my second one was, in your press release, you said that you started to roll out some of the Yahoo inventory offshore, where there's a fewer number of advertisers. Can you talk about what kind of -- how is the inventory different in Yahoo? And what are you seeing -- what are your early takes on the bigger Yahoo integration that you've learned for actually rolling out some of these offshore markets so far?

Sure. If you remember, when we announced the Yahoo, 30-year strategic partnership, one of the things that I said is that -- and this was, as an outsider, because we were not on Yahoo at the time, I said, from what we know and what -- we are talking to industry executive, working with Yahoo as an advertiser, it's a huge opportunity, because the users are very engaged. It's almost 900 million people a month, who love Yahoo, the iconic brand that have been around for 30 years. So between the mail, Yahoo finance, sports, news, users are super engaged. And advertisers are capturing this engagement in the form of conversions and growth to them. So it's a very loyal advertiser base that loves Yahoo, as much as consumers love them. This was then when I talked about it, just by talking to people in the industry and of course, talking to Yahoo. Now we're live on the international market. This is a smaller portion of Yahoo. Yahoo, obviously, the U.S is the bigger portion. But what's really encouraging me and us is that now that we're able to bring some Taboola advertisers onto Yahoo international markets, we've kind of validated this very important assumption that Yahoo is awesome. That is -- that an advertiser spending on Yahoo is able to get great conversions. And what we hope is that as we're now moving to the next stage, really the rest of the year, migrating advertisers on both sides, and bringing that into one holistic mix, this will be a great opportunity for advertisers on both sides. And we can continue to improve advertiser success, as you know, is our number one priority as a company. So what we know now is that it's awesome, it's small. But we're very excited to kind of continue to the next stage into the U.S., and ramping that up in 2024.

Thank you.

Thanks, Laura.

Thank you. [Operator Instructions] One moment for our next question. Our next question comes from Dan Day from B. Riley Securities. Please go ahead.

Yes, good morning, guys. Appreciate you taking the questions. So, just first one for Steve, just looking at the guidance and backing into the cash operating costs, and I'm thinking about that really is the delta between gross profit and adjusted EBITDA. I think the back half implies around $65 million or so per quarter. That had been more like $55 million a quarter. I understand that's mostly due to these Yahoo integration expenses really starting to hit the income statement. But can you just talk about how much of that incremental OpEx in the next couple of quarters is kind of stickier in nature? And how much of it sort of one-time in nature?

Good to hear for you, Dan. So you're correct. Almost all of that uptick in the second half comes from two areas. One is investment in Yahoo. So we will be doing incremental hiring to basically support the ramping of Yahoo that will, as Adam said, start in the second half, and then continue through the middle of next year. Those costs -- so there's two types of costs within that. So one is their sales people and account managers to manage the revenue. Those are permanent. So we will always need those people to manage the revenue coming from the relationship. And in fact, we think we'll be able to grow the relationship over time. So we may even grow the number of headcount that supporting that has the revenue growth, because we typically see that our sales and account management headcount tends to grow roughly in line with revenue. We gained some efficiencies over time, but it grows roughly in line with revenue. So those will be permanent. The tech resources that we'll be bringing on to help with the transition, those we will be able to cycle off of the project, once we get fully ramped for the most part. There's really nothing that is dramatically special about the Yahoo setup that will require permanent people on that. So we'll be able to cycle them off. So we'll probably move them to other projects at the end of the ramp, so by middle of next year. So that gives you an idea on the Yahoo. The second area that we will be doing some incremental hiring here is actually in eCommerce since it's growing so well. We've identified a number of growth initiatives with eCommerce that we think would be -- would benefit from incremental hiring would help us grow those faster. So we will be doing some incremental hiring there. I think we have enough initiatives there that those are effectively permanent. I mean, we're going to keep them on, they'll start doing new initiatives over time. But they will be effectively permanent, but they'll obviously come with a step up in our revenue there. So I hope that helps in terms of understanding kind of the cost base.

Yes, that was great, Steve. Thanks. Follow-up, probably for Adam. You talked about your response to the last question, wanting to do 100 of these timestamp, like deals with turnkey commerce. Just maybe talk about the pipeline to get new publishers up and running there? How hard is that like to -- can get this started with new publisher partners? Just generally, where you stand in terms of bringing on more partners for the turnkey commerce initiatives?

Sure, and thanks for the question. So let me start with the demand for the product. So I can tell you, we have a lot of publishers who want to launch it. In fact, we have some publishers who offer to pay for the service, because this is a [indiscernible] reminder, but just is there any way to get priority to get onto platform, given the success and how -- and people can check it out on their own, they don't even need to ask us, you just search things and you see that, the results are coming up high. So the demand for the product is, it's great. It feels like a new iPhone and everybody wants it and there's a long line. Where we are in terms of providing that to many, many publishers, we're still -- we want to make sure that we're doing a good job. So we're very focused on our existing partners, advanced media, and Time.com. There's a another big one that we will hopefully be able to share over the next quarter. And we're probably going to focus on those three for the rest of 2023. And then 2024, we'll figure out to what how much we want to expand that. So the good news is that you always want to be in a position where you have more people who want it, then you can give it. And what we're trying to do right now is focus on our early adopters, want to make sure that they're very happy and we're seeing success, because that's a priority for us. They took a chance on us. So we want to focus. But we're hopefully moving to more of a scale approach in 2024.

Great. Thanks for taking the questions.

Thank you. One moment for our next question. Our next question comes from Stephen Jue from Credit Susie. Please go ahead.

Okay, great. Thank you. So you've announced some nice publisher wins this quarter. Now understandably, Yahoo is the one that everybody is focused on right now. But can you talk about what you're hearing from everybody else? And when potentially some of the larger publishers may be coming up for RFP? Thank you.

Sure. Good morning, Steve. So we -- and I mentioned it a little bit also on my letter, we're investing a lot in technology to make sure that when publishers either think about who to work with or to renew, they get to really take a holistic view about who can help them drive audience growth, engagement growth, and revenue diversification. And it's so great to see that our investments are panning [ph] out. So I'll give you one example homepage for you, which is a way to render using AI the entire homepage, so personalize it's completely to consumers. It's like one homepage turns into a 1,000 homepages. And that gets a lot of adoption. It's now we have self service options for networks of sites. And you're hearing a lot more publishers adopting it. So this is -- it's in GA, and it's widely required by publishers. And this is something that we've been working on alongside newsroom for 7 years or so. So it's a huge investment. It's a company on its own, and it's something publishers want as well as helping them get subscription and audience distribution with Taboola News. If you think about Generative AI, and the risk of search traffic going down, publishers are asking themselves which partner is going to help me get more audience. So with Taboola News now approaching $100 million in revenue this year, it means that we're just going to continue to stand more and more people to high quality journalism and open web. So not only Taboola is the highest or among the highest revenue source, not only we're getting publishers to eCommerce, we're empowering hundreds of editorial staff with homepage personalization. We help them diversify the revenue with subscription, all those things in time of them wanting deep, deep partners. So, you're seeing great names like Barstool and Nexstar, which is these are huge wins. Geo Media Express and more in the same dynamics all over the world. This is a global phenomena of publishers looking for tech providers that can do those things. Taboola is very special. We invest more in technology than others. So, hopefully, we're right. It's that -- this is where the industry is going. We think we're right. And in terms of others that are in the pipeline, they're great names that are out there that are thinking about who to work with, and I hope to win them all.

Thank you.

Thank you. [Operator Instructions] I am showing no further questions at this time. I would like to turn the conference back over to Adam Singolda for closing remarks.

Thanks, everyone, for joining us today. I'm very excited as you can tell about where we are and the momentum within our business. We're winning publisher as in our core market, thanks to our technology investments, empowering editorial teams, helping publishers get subscribers launching their eCommerce, business and a lot more. I think publishers want less and less vendors, and more strategic partners for 5, for 10, for 30 years. Publishers want companies who invest in technology, and can do more than just paying CPM. We're also bidding our expectation on eCommerce, which is nearly 20% of our ex-TAC. And I believe eCommerce will be a big part of publishers revenue in the open web. We're bidding our expectation also on Taboola News, which is our version of Apple News for Android devices, with partners like Samsung and Xiaomi. And this business is approaching $100 million in revenue this year, from $50 million last year. Yahoo is now live on international markets. And we've validated, it's an amazing place for advertisers to beat. Our relationship with Yahoo leadership is just stronger than ever. And lastly, we expect to grow more than 10% in revenue in the second half of 2023 and in Q4 I expect us to grow more than 20% versus last quarter last year. These are exciting times for us at Taboola and also for the industry. I'm convinced there needs to be a Google type company dedicated to the open web and journalism that can be a must buy, so advertisers can for the first time ever rely on that company. And we have a real shot at [indiscernible] one. Thanks again, everyone for joining us today, and we look forward to talking to many of you over the next few weeks.

This concludes today's conference call. Thank you for participating. You may now disconnect.